Ratings agencies get into the act once again over Greece

When Europe, or even better, the globe, is teetering on a knife edge you can rest assured that one or other of the ratings agencies, or more likely all three, will choose that moment to downgrade the current cause of the panic – thus unleashing pandemonium. With the Greek PM fighting off votes of no confidence, the Greek Parliament girding itself for a horrendous austerity pledge, the Germans and the ECB going eyeball to eyeball over private investor participation in any bailout, what better moment for Fitch and Moody’s to announce that any rolling over of Greek debt will be a default as far as they are concerned?

It is as if, having conspicuously failed to rate sub-prime backed derivatives properly in the boom years, thus preparing the way for the global meltdown, the ratings agencies are now determined to be asininely rigorous, even if that, in turn, triggers another meltdown. Speaking on Reuters TV, Julian Callow, chief economist at Barclays Capital and Niels Thygesen, Professor of Economics at the University of Copenhagen both argue that this time round both the ECB and the media need to look beyond the ratings agencies to what is actually happening.

...a rock and a hard place

The problem is simple in essence. Greece cannot afford to service its mountain of debt at the current rates and cannot refinance upcoming tranches of debt at the even-steeper rates that are certain to be demanded of it. If it tries, the citizenry will oust the Government and the only politicians who will have a prayer of getting into power in Greece will be those who promise to kick the EU/IMF austerity package into the long grass. That will mean a truly messy default. Far better to arrange a “soft reprofiling” of Greek debt, the very thing that Jean-Claude Juncker, the chairman of the eurozone group of finance ministers, provoked a walk out by ECB President Jean Claude Trichet for suggesting just the other day. A soft reprofiling would mean a voluntary rolling over of Greek debt, by arrangement with its creditors, who would simply agree to lengthen the term of the debt.

The hope of all concerned was that this could be done without being regarded as a credit event (since it is just a voluntary agreement between the parties and is, of course, conditional on the Greeks signing up for still more austerity) and thus would not trigger a debt downgrade. The ratings agencies thought about it and then shot the idea down. Fitch led the way by saying that it would regard any roll-over as being tantamount to a default and would downgrade Greek debt accordingly.

Why does this matter?

Well, for a start, the ECB has rules regarding the collateral it can accept, and those rules are based on the rating of that collateral. It has been taking boatloads of Greek government debt as collateral and has bent its rules out of shape in order to do so. However, it seems that the ECB has been making it clear that another downgrade would push Greek debt beyond the pale. Not too many people understand that. They thought it was beyond the pale long ago… However, if you are in a world where you want to pretend that a judgement from a ratings agency is solid gold then that is where you are.

Having said that, I am now going to switch foot and admit that a brief browse through a ratings agency web site should demonstrate to the most sceptical critic that the agencies do a tremendous amount of work trying to understand the risks associated with a huge range of credit types, from sovereign to corporate. The vast bulk of this is hum drum, day to day, technical stuff and is very useful for a vast army of users, from banks, to governments to corporates. It is endless work since debt risk is ever-changing and requires eternal monitoring and vigilance, so good on them for doing it. Moreover, what else is a ratings agency to do about Greece other than junk its debt? Everyone else, from Pimco to the punter in the street has already junked it and shortly we will probably see Ladbrokes offering odds on when an out-and-out Greek default will happen.

The problem is simply that a ratings agency’s word on debt, by common agreement, is final, and nobody right now can afford to be pedantic about the Greek situation. If ever there was a time for skilled negotiation with plenty of wriggle room, this is it…